Steve Blank The Coming Chip Wars


A version of this article appeared in War on the Rocks.

Controlling advanced chip manufacturing in the 21st century may well turn out to be like controlling oil supply in the 20th century. The country that controls this manufacturing can strangle the military and economic power of others.

The U.S. has just done this to China by limiting Huawei's ability to outsource its internal chip designs for manufacturing by Taiwan Semiconductor Manufacturing Company (TSMC), a Taiwanese chip foundry. If negotiations fail, China could react and intensify, via one of the many agile pre-war strategic responses, possibly succeeding in forcing the foundry to stop making chips for American companies – reversing the situation in the United States.

Without war, there would be no obvious way to recover these foundries. Without them, the US defense and consumer electronics industries will be at least five years behind – and as China has its own advanced chip foundries, it could become the world leader in technology for the next decade or more.

Here's why. And how they can do it.

And why the world has become so much more dangerous.


There are two types of businesses in the chip industry.

  1. Companies like Intel, Samsung, SK Hynix and Micron design and manufacture their own products (microprocessors and memory chips) in factories they own
  2. There are also foundries, which manufacture chips designed by consumers and military customers; TSMC in Taiwan is the largest of these in the world

The chips that TSMC manufactures are found in almost everything: smartphones (i.e. Apple iPhones), high-performance computing platforms, PCs, tablets, servers, base stations and game consoles, devices connected to the Internet such as smart wearables, consumer digital electronics, cars, and almost all weapon systems built in the 21st century. About 60% of the chips that TSMC manufactures are intended for American companies.

Context
In 2012, a bipartisan committee of the US House of Representatives investigated whether Chinese company Huawei had installed backdoors in its equipment that allowed it to spy on the data found there. The committee found that Huawei could not or did not want to explain its relationship with the Chinese government and was not in accordance with American law. The report recommended that no government system or subcontractor includes Huawei systems. In 2019, the U.S. Department of Commerce's Bureau of Industry and Security added Huawei to its list of entities, effectively restricting the sale or transfer of U.S. technology to society (although ; a series of licenses has been granted to lift the restrictions in some cases.)

This month, the Commerce Department demanded that overseas semiconductor companies that use U.S. technology and equipment apply for a license before selling to Huawei. The order was for TSMC, which is Huawei's main supplier of advanced chips; without it, Huawei will be at a disadvantage compared to Apple or Samsung in the smartphone industry, and Cisco and others in the network equipment market. (Some analysts have pointed out that there were potential gaps in the order.) Then it is likely that Washington will ban the sale to China of the equipment used to make chips, which comes from companies like Applied Materials, KLA and Lam.

TSMC was forced to choose side and chose the United States – For Now
In May 2020, TSMC announced that it would build a $ 12 billion smelter in Arizona to manufacture some of its most advanced chips. Foundries take at least three years to build and the most expensive factories on the planet. Construction of the TSMC facility is expected to begin in 2021, but actual chip production will not begin until 2024.

But while TSMC's announcement is welcome, if and when the Arizona smelter is built, it will only be able to achieve about a quarter of the chip production from the world's largest manufacturing plants. semiconductors from TMSC and would represent only 3% of TSMC's manufacturing capacity. currently operates in Taiwan. They have four large manufacturing sites, called GigaFabs, which each have 6 or 7 fabs producing thirteen million platelets per year. Compare that to the quarter of a million wafers they plan to produce in the United States in 2024. So if the United States lost TSMC in China, a new American factory would not compensate for the difference in capacity.

Chinese semiconductor industry
A decade ago, China recognized that its initial success as a low-cost global factory would take its course. As the cost of Chinese labor increased, other countries like Vietnam could fill this role. As a result, China had to build more advanced and sophisticated products on a par with the United States. However, most of these products required custom chips – and China did not have the domestic manufacturing capacity to manufacture them. China uses 61% of the world's chips in products for both its domestic and export markets, worth approximately $ 310 billion in 2018. China has acknowledged that his inability to manufacture the most advanced chips was a strategic Achilles heel.

China has devised two plans to solve these problems. The first, the Made in China 2025 plan, is the country's roadmap and financing vehicle for updating China's manufacturing base, from the manufacture of low-tech products to the rapid development of ten high industries technology, including electric cars, next-generation computing, telecommunications, robotics, the artificial. intelligence and advanced chips. The goal is to reduce China's dependence on foreign technology and promote Chinese high-tech enterprises to the world. In addition, to encourage Chinese high-tech companies to go public in China rather than the United States, the Chinese government has implemented its own version of Nasdaq called the Shanghai Stock Exchange Science and Technology (STAR) market. Innovation Board).

China's second plan is the National Integrated Circuit Plan, China's road map for building an indigenous semiconductor industry and accelerating chip manufacturing. The goal is to meet local demand for chips by 2030.

Make no mistake, these are not government statements that do not end up anywhere. It is a massive national effort. China is spending over a hundred billion dollars to become a world leader in the development of its semiconductor industry. The China Integrated Circuit Industry Investment Fund or Big Fund raised $ 51-22 billion in 2014 and $ 29 billion in 2019. China used capital to start more than 70 projects in the semiconductor industry (such as building factories and foundries, acquiring foreign companies and creating joint ventures) and went from zero to 16% of the global chips, although today their quality is low. In the future, China plans to start investing in chip design software, advanced materials and semiconductor manufacturing equipment.

How do the Chinese see our actions?
China believes this is their century and believes that US actions are aimed at moving China away from its fair place in the world. Given the importance of controlling the supply of advanced chip manufacturing, China would be forced to react if the United States cut off access to that supply.

The question is whether China will view the action against Huawei as sanctions against a single company or as a sign of further action against China's access to advanced chips.

What has China learned from our past actions?
At 21st century, the United States blinked even when its own interests were at stake. From the point of view of some Chinese policy makers, America is exhausted from the endless wars in Iraq and Afghanistan and will no longer fight . They see that the United States is politically divided, distracted by the COVID-19 pandemic and unlikely to risk American lives for something as abstract as a flea factory.

Protests on paper
When China has acted aggressively for the past two decades, it has seen that the American response has been largely protests on paper. In 2012, China occupied the shoal of Scarborough and took control of it in the Philippines. Since China was not ready to militarily confront the United States at the time, in hindsight, the United States could have parked an attack group of carriers on these shoals and probably prevent their military construction plans. Instead, Washington blinked and did nothing but send an unpleasant note.

Today, the Spratly Islands have new Chinese bases bristling with surface-to-air missiles, cruise missiles and fighter aircraft, which has changed the math of a war in the Western Pacific . Any attempt by the United States to control airspace in the region will face serious opposition and heavy losses. What was once an undisputed American "lake" is now disputed by China.

Until this week, Hong Kong, while part of China, was a democracy with guarantees of freedom of speech, assembly and the press. China has recently torn up this agreement and is preparing to impose the same draconian limits on the speech, assembly and press that muzzle the rest of China. The United States can do little more than voice its concerns and perhaps remove Hong Kong's special trade status. But China doesn't care. They have already factored in the American response in their decision and decided that it is worth it, with the cynical calculation that any American response would make Hong Kong poorer and that any business lost by Hong Kong would mainly end up in d & # 39; other parts of China. And a poorer Hong Kong will punish its citizens for defending the rights that were promised to them.

The day after China's move to Hong Kong, Chinese Premier Li Keqiang left out the word "peaceful" when referring to Beijing's desire to "reunite" with Taiwan, claimed by China, for a change in policy apparent.

The lack of an effective American response to these events has shown Chinese leaders America's reluctance to engage forcefully in Asian affairs. This will encourage China's next move.

China's objectives and options
In response to the U.S. shutting down Huawei's access to Taiwan's most advanced chip foundries, the Chinese government is probably considering its next steps. Their planning begins with what they want to accomplish. It may look something like this in the preferred order.

  1. Back to the status quo – Restore Huawei's access to TSMC factories to guarantee a regular supply of chips
  2. Don't let the restrictions get worse
  3. Turn the tables – Convince TSMC / Taiwan to allow China to have exclusive access to TSMC
  4. Kick on the table – Make sure TSMC fabs cannot be used by anyone

China options
So how could China achieve these goals?

China may want to avoid any escalation, perhaps by accepting the American restrictions as they currently stand with the promise that they will go no further. This return to the status quo, with the reestablishment of Huawei's access to the TSMC foundry, may simply require the negotiation of some form of trade agreement or the acceptance of restrictions on the sale of Huawei network equipment (34% of their revenues). This type of deal would allow consumer businesses and Huawei businesses (66% of their revenues) to survive and thrive. However, this forces the Chinese to back down. And they may have decided that the Rubicon had been crossed.

If China does not negotiate but responds, the danger is that the United States will further increase the stake by prohibiting TSMC from working with more Chinese companies and / or prohibiting the sale of the equipment used to manufacture chips to any business in China. Such an escalation may lead China to believe that US stocks are not a dispute over Huawei, but a salvo in a larger economic war.

If this gets to this point, China's plans are no longer how to negotiate with the United States, but how to force TSMC to auction. And since TSMC is in Taiwan, in what China claims to be a Chinese province, things can get interesting.

The most obvious option is to simply carry out the threat that the Chinese government has been making since 1949: that there is only one China, and Taiwan is a rebel province, and that they will reunify China, by force if necessary. An invasion or blockade of Taiwan would give Chinese extremists a reason to try all of their new military equipment, while distracting the masses from the pandemic economic downturn. This option has the highest risk of provoking a US military response, and although this is extremely unlikely. While these more aggressive scenarios may seem implausible, China's behavior has become more aggressive and risk-tolerant as the COVID-19 pandemic, which started in Wuhan, shakes the world.

China can achieve its immediate goals of 3 and 4 above and weaken Taiwan without outright invasion.

One option is a large disinformation campaign against TSMC and the United States that would make the current influence campaigns from China pale in comparison. This would point out that the United States is the aggressor, illegally waging an economic war against China. He announced that Taiwan being a Chinese province, China has the right to restrict sales of TSMC to the United States and that China applies an embargo on all sales of TSMC to affiliates in the United States.

This could be associated with an equally massive disinformation campaign among the Taiwanese people, pointing out that the United States will not go to war against a semiconductor company and that China requestsare just and reasonable. (The effectiveness of a disinformation campaign is debatable, given that the Chinese campaigns in the January elections in Taiwan did not lead to the election of China's preferred candidate. ) China could offer a non-invasion pledge in return, while reminding the Taiwanese government of what they already know: whatever the promises, the United States cannot defend them. Even if the United States attempted to intervene, there was a serious debate about the usefulness of the old American platforms – especially the carriers – in a shooting war with China.

There is a high probability that Taiwan still refuses despite all of this, so China would then increase the pressure.

China could then start a kind of trade war with Taiwan to guarantee access, following the game manual used by Beijing to force Korea over High Altitude Area Defense (THAAD) or Australia regarding its recent decision to appeal to investigate the origins of the new coronavirus. In the extreme, these Taiwanese chip foundries could be the subject of an aggressive sabotage campaign.

Finally, they could nationalize the two less advanced TSMC factories in mainland China. Then, if there is no agreement, China could launch a precision guided missile strike against one of Taiwan's oldest and least advanced TMSC factories for send a message that they are serious. They could announce that they would destroy a foundry every week until TMSC agrees to sell only in China. Even if they destroy all the TSMC foundries in Taiwan, it will still be a clear victory for China. It is highly unlikely that Taiwan will go to war with China over this. The end result would be that US military and consumer technologies would not have advanced foundries, unlike China.

What would the United States do?
Would the United States wage war on China for crisps? Losing TSMC would mean we quickly scramble to find other sources. We could turn to Intel to restart their foundry business or we could turn to Samsung or even Global Foundries. But the transition and recovery would take at least three to five years if not more and tens of billions of dollars. In the meantime, we would have a second level status in technology.

The outcome may depend on the timing of Chinese actions.

When could China act?

An October surprise – Before the 2020 elections
The current U.S. administration may not want to start a war against a chip factory before the 2020 presidential election, but it is sufficiently unpredictable that an election campaign focused on Chinese politics could change the math.

After the 2020 elections
If the presidency changes hands, the incoming administration could defuse and reverse the original restrictions, but a lot can happen by January 2021.

A Trump administration in his second term and no longer worrying about his re-election could reverse the decision in exchange for a better trade deal.

Disadvantage: a lot of economic uncertainty for the next seven months, exacerbating the resumption of the pandemic in China. More immediate action may be required.

Lessons learned

  • The dispute over Huawei's access to TSMC has highlighted the vulnerability of the US industry to the loss of its sole supply of advanced chips.
  • If the problem cannot be resolved through negotiation, China may perceive the restrictions as an economic war and escalate rapidly, potentially threatening Taiwan
  • It is not at all clear that Washington has thought about the consequences of its actions here, or that the current administration has viewed chip supply as part of a chain security wider supply and a national industrial policy.
  • Given that China has more positive options than the United States, it is surely time for officials to consider where this could lead.

Filed under: China |